Friday, February 26, 2010

Full disclosure: I am not a Ron Paul fan. I know that he has a loyal and devout following but I am not one of them. He has been going around saying that the Fed has doubled the money supply. It hasn't. M2 (currency, checkable deposits, small time and savings deposits) has increased from $6.6 trillion to $8.5 trillion from 2006 to December 2009 - certainly not a doubling. What Paul probably meant was to say that the monetary base (currency plus bank reserves) has doubled - from $813 billion to $2 trillion. This is not trivial. The base is the fuel of the money supply, but it is not the money supply. The Fed can control the base by contracting reserves which will limit money supply growth. Indeed, Ben Bernanke has outlined such a plan, but I think Bernanke's plan is suboptimal. He wants to discourage the banks from making loans by paying higher rates of interest on their reserves. A more efficient way would be to raise the reserve requirement to 100 percent. Then the banks could not make any loans at all and thereby could no longer create money. Loans would still be made but through a non-depository bank subsidiary that would borrow the funds and then lend them out - much like mortgage bankers and finance companies do already. But I digress. In addition to continuing to spout misinformation, when Bernanke gave his semi-annual testimony to Congress (Humphrey-Hawkins Report) on February 24, Paul used the occasion to accuse the Fed of making secret loans to Saddam Hussein during the 1980s and funding the break-in at the Watergate. Needless to say Bernanke was taken aback, probably both by the sheer audacity of the allegations as well as their irrelevance to his testimony. Bernanke responded the Paul's charges were "absolutely bizarre." Bizarre is an understatement. Ron Paul has simply lost it - if he had "it" in the first place.

Saturday, February 13, 2010

It is no secret that the US budget is out of control and that the country is careening toward bankruptcy. The congress and the president are spending recklessly and are doing severe damage to the US economy. They appear to have no way of containing themselves. The president introduced his budget by proclaiming fiscal responsibility while at the same time giving us a budget with mind-numbing numbers. In two years the proposed budget deficit has grown from $239 billion to $1.17 trillion while the national debt burden has grown from $5.4 trillion to $14 trillion. There is no excuse for this – despite the recession.

The president has declared to pare down expenditures on “discretionary expenditures.” In reality, all expenditures are discretionary because the congress can make it so. In fact the problem, as everyone knows, does not lie in discretionary expenditures. The problems are in the sacrosanct entitlement programs that consume more and more of the budget and propel its growth. What can be done? First, the government should roll expenditures back to the 2008 levels. One way to do this is to only fund those items in the 2008 budget at the 2008 level. Another, but suboptimal solution, would be for the president to propose an across the board cut in federal spending of $550 billion. Since it is virtually impossible to target specific programs in the budgetary process, the president would say that each federal department will receive 20 percent less and they will decide how to allocate the cuts.

Second, all subsequent budgets should limit federal expenditures to their historical average of 20 percent of GDP. I have suggested this before. But I know that congress has no appetite to cut and will always be tempted to continually increase spending. As a consequence, since the congress seems incapable of prudent fiscal management, I suggest that we amend the Constitution to limit federal government spending to 20 percent of the previous year's GDP. Government expenditures can be raised only If the president declares a national emergency – such as in the case of war – but only with a two-thirds majority of both houses of congress and then only for one year. Now I am not naïve. I realize that there is no chance that the US congress will initiate and approve such an amendment. However, the Constitution allows for a Constitutional amendment to be initiated by a convention of states. I then call for a grassroots campaign to have each state legislature appoint a delegation to a constitutional convention to frame such an amendment and recommend it to the state legislatures for a vote. Only a simple majority vote is required at the state level. If three-fourths of the states approve the amendment it is sent to the congress where a two-thirds majority in each house is required. I would think that ratification would almost be assured. If any member of either house voted against ratification, their political future would be imperiled.

Sunday, February 7, 2010

I have been seeing growing attacks by conservatives on Milton Friedman. Some even have gone so far as to call him a Keynesian. This is the ultimate insult. Since Friedman is not here to defend him self I will do it for him. Friedman is being attacked because in his Monetary History of the United States, he chided the Fed for allowing the money supply to collapse by one-third. Friedman contended that if the Fed had supplied liquidity to the banking system, we would have still had a recession in 1933 but not a depression. Supplying liquidity would have prevented most of the banks from failing during that period as well. Fed chairman Ben Bernanke is a student of the depression and has supplied massive amounts of liquidity into the economy. Some writers take this as learning from Friedman. However, Bernanke is no student of Friedman. Recall that one of his sternest critics has been Friedman's co-author, Anna Schwartz who has said that Bernanke is not up to the task. The difference is the Friedman would have provided liquidity to the banks that were having liquidity drains. He would not have endorsed this Fed's commercial paper facility, TALF facility, bail outs of AIG and the investment bankers. Lastly only a fool would write that Friedman is a Keynesian. A Keynesian believes that you can spend your way out of a recession by having the government spend more and more. Friedman said that if you don't expand the money supply then all the government spending will not affect positively GDP. Friedman is no Keynesian.

The president speaking before a republican retreat in Baltimore said "I am not an ideologue." Au contraire. He had his opportunity to prove that he wasn't and he demonstrated that he was. When Scott Brown was elected in Massachusetts taking away the dems 60 vote majority in the senate, most politicians would have changed course. This is especially true given the results in New Jersey and Virginia. Most politicians would have seen the light, moderated their course and reached out to the other party. However an ideologue would have blindly ignored all the signs and charged along the same path. The president chose the latter course. He went before the democrats in congress and said that he was still going to push for health care and for cap and trade. His budget is shamelessly reckless. He went before the nation and said "It is time to save what we can, spend what we must and live within our means once again." Then he gave us a budget that blows the top off the economy with its $3.8 trillion in spending and $2 trillion in new taxes and a $1.6 trillion deficit. He must think we are all fools to embrace this irresponsible budget. If the president had any credibility left he lost it with this budget.

I feel sorry for Christina Romer. As chairman of Obama's Council of Economic Advisors she is forced to defend the indefensible. She was being interviewed on Fox Business and was asked if she really thought that raising taxes by $2 trillion on the wealthiest citizens during a recession would create jobs. She hemmed and hawed and finally said that the entire package of tax hikes and spending would create jobs. She knows better. It is amazing to see that this woman who is an accomplished economist being reduced to an administration hack shilling for the president. On more than one occasion she has had to endorse policies that have directly contradicted her academic writings. It is obvious that this president is ignorant of economics and is pushing policies that most economists will tell you are destructive to the economy. It is also obvious that Obama's economists are committed to trying to put a happy face on terrible initiatives rather than trying to educate the president on basic economics. I don't know of an economist who actually thinks like the president that we can spend our way out of the recession. Politicians yes. Economists no. A congressman from South Carolina - James Clyburn - actually said exactly that we needed to spend more to get out of the recession. If Romer had any pride at all she should resign. The Council of Economic Advisors is far from being a plum job - especially if you are being ignored. It also pays less than her professorship at Berkeley and is sullying her once good reputation. So why doesn't she keep her dignity and just quit?

Thursday, February 4, 2010

I wrote once that “the government cannot create jobs”. The president has been saying that his programs have slowed job destruction in the country. Once he said that his programs would keep the unemployment rate under 10 percent. That was when it was 8.5 percent. Now that it is over 10 percent, the president is saying that things would be worse if his programs of “stimulus” and spending had not been implemented. Of course he is wrong. As I have written before, we keep ignoring the fact that no stimulus program has ever worked. This is because consumers and businesses do not change their consumption/investment behavior over some change that is temporary. So the money was used to reduce debt rather than to generate growth. If the president wanted to really create jobs, he would favor changes that were permanent that create jobs. However, he is doing just the opposite. The proposed budget contains $2 trillion in new taxes on households and businesses that are permanent unless changed by some future president and congress. What I am wondering is if we as a nation has ever increased taxes during a recession. The answer is yes. Franklin Roosevelt did it during the Great Depression. The result was to prolong the depression through the 1930s. This president who envisions himself as a new Roosevelt is following in his footsteps. Not only by raising taxes during an economic downturn, but also by declaring war on the banks to divert attention from his own disastrous policies.

However, the president has created jobs. First he has proposed to forgive student loans for those who choose to work for the government. That of course should increase the supply of those applying for government work. Second, and more directly, federal government employment has grown by 14.5 percent under this administration’s first two years.

About Me

Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com